multiple choice chapter 10
A virtually exclusive reliance on financial controls may occur when outsider-dominated boards exist. This may lead to all of the following EXCEPT: a. high executive turnover. b. increased diversification of the firm. c. excessive management compensation. d. a reduction in R&D expenditures.
a
Amos Ball, Inc., is a printing company in Iowa that has been family owned and managed for three generations. Which of the following statements is MOST likely to be true? a. Agency costs at Amos Ball are high. b. Amos Ball, Inc. will perform better if a family member is CEO than if an outsider is CEO. c. At Amos Ball, the opportunity for managerial opportunism is high. d. The functions of risk bearing and decision making are separate at Amos Ball.
b
As ownership of the corporation is diffused, shareholders' ability to monitor managerial decisions: a. increases. b. decreases. c. remains constant. d. is eliminated.
b
At a recent stockholders meeting for Ignate Inc., a group of stockholders expressed disagreement with the way that the managers were using free cash flow. Because they wanted to be able to control how the cash is invested, the stockholders lobbied that the free cash flow should be: a. used to pursue cross-border acquisitions. b. distributed to them as dividends. c. invested in new research and development. d. used to pay down corporate debt.
b
Because activist pension funds are __________ in nature, they tend to take action when __________. a. reactive; a firm's performance, no matter the current level, could be improved b. reactive; a firm is underperforming c. proactive; a firm's performance is average or above-average d. proactive; a firm is overperforming but undervalued
b
Compared to managers, shareholders prefer: a. safer strategies with greater diversification for the firm. b. riskier strategies with more focused diversification for the firm. c. safer strategies with more focused diversification for the firm. d. riskier strategies with greater diversification for the firm.
b
Corporate governance is important to nations because: a. shareholders want large stock returns. b. firms seek to invest in nations with national governance standards that are acceptable to them. c. company boards have lobbied for strong governance. d. the United States requires that other nations adopt its governance practices.
b
Corporate governance primarily revolves around the relationship between which of the following two parties? a. Shareholders and the board of directors b. Shareholders and managers c. The board of directors and managers d. Owners and customers
b
Generally, a board member who is a source of information about a firm's day-to-day activities is classified as a(n) __________ director. a. lead independent b. inside c. related d. encumbered
b
In the United States, the fundamental goal of business is to: a. ensure customer satisfaction. b. maximize shareholder wealth. c. provide job security. d. generate profits.
b
International Food Services (IFS) has a contract with the Marines to supply meals for its troops in Afghanistan and other foreign assignments. As a means of increasing profits, IFS has used substandard ingredients in these meals and has consistently lied about this practice during quality investigations by the Marines. Which of the following is ultimately responsible for the corporate climate that resulted in this wrongdoing? a. Director of food service for IFS b. Board of directors of IFS c. Employees directly involved in the wrongdoing d. Head of contract services for the Marines
b
LeederTech is facing a hostile takeover. Its focus as a defense strategy has been to ensure some continuity. It has decided to pursue a strategy that will prevent an acquirer from replacing the entire board of directors immediately, even though this tends to have very low success and a negative or negligible effect on shareholder wealth. What strategy did LeederTech select? a. Capital structure change b. Corporate charter amendment c. Greenmail d. Poison pill
b
Managers in the United States receive __________ compensation than managers in the rest of the world. a. equivalent b. higher c. lower d. more variable
b
Ownership concentration is determined by both the number of: a. large-block shareholders and the parties they represent. b. large-block shareholders and the total percentage of shares they own. c. outside directors and the parties they represent. d. outside directors and the total percentage of shares they own.
b
Simon Leagreet, the chairperson and CEO of L-EVA Industries, Inc., has long been the major power at L-EVA. A majority of the directors are concerned that, while Mr. Leagreet has been responsible for the firm's earning above- average returns, he has been displaying a tendency toward personal extravagance at the firm's expense. In order to limit Mr. Leagreet's power, the board of directors plans to: a. elect an insider as the lead director. b. appoint another individual as chairperson of the board of directors. c. require Mr. Leagreet to personally certify the firm's financial reports. d. reduce the size of the stock option package provided to Mr. Leagreet.
b
The CEO of Skyco, a publicly traded company that has been earning below-average returns, has been publicly criticized by shareholders for persuading the board of directors to give her interest-free loans, for having the company purchase and furnish a lavish apartment in Paris for her personal use on her twice-yearly trips there, and for excessive stock options. The CEO's behavior may be an indication of: a. reasonably compensating a CEO. b. a weak board of directors. c. the laxity of institutional investors. d. the difference in risk propensity between owners and managers.
b
The New York Stock Exchange requires that the audit committee be: a. available to comment to external analysts. b. headed by outside directors. c. liable for any illegal actions by the top management team. d. made up of CPAs with auditing experience.
b
All of the following are consequences of the Sarbanes-Oxley Act EXCEPT: a. a decrease in foreign firms listing on U.S. stock exchanges. b. internal auditing scrutiny has improved and there is greater trust in financial reporting. c. an increased number of IPOs (initial public offerings) d. Section 404 creates excessive costs for firms.
c
Which of the following is NOT an internal governance mechanism? a. Board of directors b. Ownership concentration c. Executive compensation d. Market for corporate control
d
Given the demands for greater accountability and improved performance, which of the following is NOT a voluntary change many boards of directors have initiated? a. Moving toward having directors from different backgrounds b. Strengthening the internal management and accounting control systems c. Compensating directors with stock options rather than with fixed remuneration d. Establishing and using formal processes to evaluate the board's performance
c
If the market for corporate control were efficient as a governance device, then only __________ would be targets for takeovers. a. firms with unethical top executives b. firms earning above-average returns c. poorly performing firms d. overvalued firmsq
c
In the United States, a firm's key stakeholder(s) is(are) the: a. government. b. executives. c. shareholders. d. customers.
c
Institutional owners are: a. shareholders in the large institutional firms listed on the New York Stock Exchange. b. banks and other lending institutions that have provided major financing to the firm. c. financial institutions, such as mutual funds and pension funds, that control large-block shareholder positions. d. prevented by the Sarbanes-Oxley Act from owning more than 50 percent of the stock of any one firm.
c
KorniCo. is considering possible strategies to defend against a hostile takeover. They have narrowed it down to four options. Because of pressure from shareholders, they need to adopt a strategy that is shown to have a positive effect on shareholder wealth. Based on that criterion, which of the following should they choose? a. Capital structure change b. Corporate charter amendment c. Litigation d. Greenmail
c
Managerial employment risk is the: a. risk that managers will behave opportunistically. b. risk undertaken by managers to earn stock options. c. managers' risk of job loss, loss of compensation, and/or loss of reputation. d. risk managers will not find a new top management position if they should be dismissed.
c
One means that is considered to improve the effectiveness of outside directors is: a. mandating that all outside directors be drawn from government or academia rather than industry. b. requiring that outside directors be former executives of the firm. c. requiring outside directors to own significant equity stakes in the firm. d. requiring that outside directors act objectively and have no ownership interest in the firm.
c
Prints4U is a small printing firm in Minneapolis, MN. As is typical for a firm of this size, the managers own a __________ percentage of the firm. As a result, there is __________ separation between ownership and managerial control. a. small; less b. small; greater c. large; less d. large; greater
c
In Japan, the principal source of the active monitoring of large companies comes from: a. boards of directors. b. stock brokerage companies. c. the government. d. banks.
d
Monitoring by shareholders is usually accomplished through: a. management consultants. b. government auditors. c. the firm's top managers. d. the board of directors.
d
Product diversification provides two benefits to managers that do not accrue to shareholders: __________ and __________. a. greater experience in a wider range of industries; lessening of managerial employment risk b. the manager frequently invests in the acquired firm, which allows him or her extensive profits; the manager can frequently buy excess assets divested by the acquired firm c. the manager's supervisory needs are lowered; the manager is allowed greater time to oversee a wider range of activities d. the opportunity for higher compensation through firm growth; a reduction in managerial employment risk
d
Research suggests that boards of directors perform better if: a. the CEO is also the chairperson of the board of directors. b. the board includes employees as voting members. c. the board is homogenous in composition. d. outside directors own significant equity in the organization.
d
A hostile takeover defense wherein the target firm makes its stock less attractive to a potential acquirer is called: a. greenmail. b. a standstill agreement. c. crossing the palm with silver. d. a poison pill.
d
Ambrose Bierce, the CEO of DictionAry, has been paid a lump sum amounting to three years' salary because DictionAry has been bought in a hostile takeover by its main competitor. Ambrose received: a. a golden parachute. b. a poison pill. c. greenmail. d. a silver handshake.
a
Broadly, the Dodd-Frank Wall Street Reform and Consumer Protection Act seeks to: a. align financial institutions' actions with society's interests. b. increase the number of foreign firms listing on U.S. stock exchanges. c. require CEOs to attest to the accuracy of their companies' financial reports. d. increase consumer protection in pharmaceutical products.
a
Historically, __________ have been at the center of the German corporate governance system. a. banks b. institutional shareholders c. public pension funds d. government agencies
a
Recent changes to Japan's corporate governance structure include which of the following? a. The role of banks in monitoring managerial behavior is less significant. b. Deregulation in the financial sector has increased the cost of mounting hostile takeovers. c. Increased regulation has spurred activity in the market for corporate control. d. The part banks play in controlling firm outcomes has become increasingly meaningful.
a
The board of directors of CyberScope, Inc., is designing a stock option plan for its CEO that will motivate the CEO to increase the market value of the firm. Consequently, the board is: a. setting the option strike price substantially higher than the current stock price. b. ensuring that the strike price value of the options can be lowered if the organizational environment becomes more risky. c. having the stock option plan designed by insiders on the board of directors who are familiar with day-to-day operations of the firm. d. consulting accounting advisors to make sure that the plan transfers wealth to the CEO without immediately appearing on the balance sheet of CyberScope.
a
The repurchase of the target firm's shares of stock that were obtained by the acquiring firm at a premium in exchange for an agreement that the acquirer will no longer target the company for takeover is called: a. greenmail. b. a standstill agreement. c. crossing the palm with silver. d. a poison pill.
a
The top management team at Sierra Infusion is concerned about the declining performance of firms in their industry. The team members are becoming concerned about the security of their jobs at Sierra Infusion. At a meeting over dinner, the top management team agrees to go to the board of directors with a proposal for: a. increased diversification of Sierra Infusion. b. the addition of outside directors to the board. c. increased shareholder participation in decision making. d. greater concentration on Sierra's core industry.
a
There has been an increased need for effective collaboration between board members and top-level managers as boards of directors have become more involved in: a. the strategic decision-making process. b. selecting new CEOs. c. the firm's tax issues. d. governmental relations.
a
Usually, large-block shareholders are considered to be those shareholders with at least __________ percent of the firm's stock. a. 5 b. 25 c. 50 d. 75
a
The board of directors of CamCell, Inc., wishes to design a CEO compensation plan that will align the personal interests of the CEO with the interests of the shareholders in long-term firm performance. The board wishes the CEO to take more short-term risks in order to achieve potentially higher long-term returns. Consequently, the board has decided on an incentive plan that involves payout based on the firm's performance five years in the future. CamCell is presently searching for a new CEO. Which of the following statements is true? a. This plan will be very attractive in luring candidates for the CEO position. b. CamCell may have to over-compensate its CEO in order to offset the personal risk a CEO would undertake under this plan. c. Institutional investors disapprove of long-term executive incentive plans and they may sell their blocks of stock in CamCell. d. This type of plan is likely to cause the CEO to underinvest in R&D in order to boost CamCell's long-term profitability.
b
The longer the focus of managerial incentive compensation, the greater the __________ top-level managers. a. earnings potential for b. risks borne by c. incentives for d. potential tax burden for
b
The market for corporate control serves as a means of governance when: a. the firm is overpriced in the market. b. internal controls have failed. c. the corporation has greatly exceeded performance expectations. d. the top management team's interests and the owners' interests are aligned.q
b
Which of the following statements about corporate governance in China is false? a. The Chinese governance system may be tilting toward the Western model. b. Private firms seek to establish political ties with the government to increase market value and avoid potential conflict between the principals. c. The state still uses direct and/or indirect controls to influence the strategies employed by most firms. d. Firms with higher state ownership tend to have lower market value and more volatility in those values over time.
b
Why would the top-level managers at Nutzandboltz, a hardware company, decide to invest free cash flow in product lines such as clothing or toys? a. To defend against a hostile takeover b. To increase the level of diversification c. To enhance executive compensation d. To minimize managerial risk
b
__________ is an important influence in Japanese corporate governance structures. a. Innovation b. Consensus c. Competition d. Individualism
b
Several members of the board of directors of American Textile Products (ATP) have proposed creating the position of lead director. Which of the following circumstances would MOST likely have initiated this proposal? a. ATP has been the initiator of several hostile takeovers in the last two years. b. The board has been successful in reducing the percentage of CEO pay that is composed of stock options. c. The CEO/chairperson of the board has been suspected of opportunistic behavior. d. The firm is traded on the New York Stock Exchange and must change its corporate governance to comply with the NYSE's new rules.
c
The market for corporate control may not be as efficient as previously thought as recent findings suggest that those firms targeted for takeover by active corporate raiders are: a. usually on the verge of bankruptcy. b. typically underperforming their industry. c. often performing above their industry averages. d. always outperforming their industry.
c
The separation between firm ownership and management creates a(n) __________ relationship. a. governance b. control c. agency d. dependent
c
A major conflict of interest between top executives and owners is that top executives wish to diversify the firm in order to __________, whereas owners wish to diversify the firm in order to __________. a. generate free cash flows; reduce the risk of total firm failure b. increase the price of the firm's stock; increase the dividends paid out from free cash flows c. reduce the risk of total firm failure; reduce their total portfolio risk d. reduce their employment risk; increase the company's value
d
Agricultural Chemicals, Inc., was the target of a hostile takeover six months ago. The CEO and the top executives successfully fended off the takeover and are concentrating on strategies to improve the performance of the firm. Which of the following statements is MOST likely to be true? a. Hostile takeover attempts are so common that they do not reflect negatively on the firm's performance. They are more a function of general market conditions. b. The fact that a hostile takeover has occurred is proof that the firm was underperforming. c. Research shows that once a hostile takeover has been defeated, the firm is safe from other hostile takeover attempts for many years. d. The CEO and top executives should not consider their jobs secure.
d
All of the following are areas covered by the Dodd-Frank Wall Street Reform and Consumer Protection Act EXCEPT: a. consumer protection. b. CEO compensation. c. regulation of derivatives. d. retirement accounts.
d
All of the following statements are true about the use of defense tactics by the target firm during a hostile takeover EXCEPT defense tactics: a. are usually beneficial for the executives of the target firm. b. are opposed by institutional investors. c. vary in their effectiveness as a defense to takeovers. d. make the costs of a takeover lower.q
d
Corporate governance is all of the following EXCEPT: a. a set of mechanisms used to determine and control the strategic direction and performance of organizations. b. a means to establish and maintain harmony between owners and top managers whose interests may conflict. c. a way to ensure that top managers' interests are aligned with the interests of stockholders. d. a method for resolving conflicts among corporate employees.
d
Executive compensation is a governance mechanism that seeks to align managers' and owners' interests through all of the following EXCEPT: a. bonuses. b. long-term incentives such as stock options. c. salary. d. penalties for inadequate firm performance.
d
The CEO and chairman of the board of directors of Alta Corp. is dismayed by a lack of effort and insights the members provide during board meetings. The directors are all outsiders, are experienced, and run their own successful firms. The CEO/chair genuinely seeks their greater involvement. Which of the following would you recommend? a. Requiring that the directors own stock in the company b. Establishing a formal process to evaluate the board's performance c. Electing a lead director d. All of these are correct.
d
The governance mechanism MOST closely connected with deterring unethical behaviors by holding top management accountable for the corporate culture is: a. ownership concentration. b. the market for corporate control. c. executive compensation systems. d. the board of directors.
d
The interests of multinational corporations' shareholders may be best served when there is: a. a uniform compensation plan for all corporate executives—both U.S. and foreign. b. executive compensation that is primarily based on long-term performance. c. elevation of foreign executive compensation to U.S. levels. d. a variety of compensation plans for executives of foreign subsidiaries.
d
The ownership of major blocks of stock by institutional investors has resulted in all of the following EXCEPT: a. making CEOs more accountable for their performance. b. challenges to the decisions of boards. c. focusing attention on ineffective boards of directors. d. a direct effect on firm performance.
d
Which of the following reasons would NOT explain the difficulty of determining appropriate executive compensation? a. The decisions made by top-level managers are typically complex and nonroutine. b. An executive's decisions often affect firm performance only over the long run. c. A number of factors intervene between top-level management decisions and firm performance (e.g., unpredictable economic, social, or legal changes). d. The compensation committee may not have comprehensive firm performance data.
d
Which of the following statements about corporate governance is false? a. Governance is used to establish order between parties whose interests may be in conflict. b. Corporate governance mechanisms sometimes fail to monitor and control top managers' decisions. c. Corporate governance mechanisms can be in conflict with one another. d. Corporate governance is best achieved with a board of directors with strong ties to management.
d